Where is the value for discretionary managers?

The first half of the year could be summarised as very strong performance for the first quarter, followed by negative returns across almost all risk categories during the second; returns from broad financial markets for the first half of the year are listed in the table opposite.

There has also been variability within and across asset classes and sectors. Private client discretionary managers have performed reasonably well under these conditions, as reflected by the Asset Risk Consultants (Arc) Private Client Indices (see chart opposite).

The year started strongly on a wave of optimism, partly fuelled by European Central Bank president Mario Draghi’s suggestion that the sovereign debt crisis may be over.

As a result, equity focussed portfolios saw returns in the region of 5 per cent in January.

The general consensus among discretionary managers was that eventually quantitative easing (QE) will result in higher endemic inflation and thus their exposure to index-linked gilts generated good returns in cautious portfolios.

Currency exposure also played a part with sterling weakening in response to the UK downgrade and expected reduced speed of debt reduction.

This favoured managers with a more international focus in their portfolios – un-hedged US dollar exposure granted a significant tailwind for sterling investors during the first quarter of the year.

The first three months of 2013 ended focusing on fears of eurozone debt contagion due to the issues in Cyprus.

In spite of this, risk assets pushed ahead as global equity markets returned circa 8 per cent in sterling terms.

Japanese equities were stand-out as the weak currency and the new Bank of Japan governor Haruhiko Kuroda’s aggressive growth strategy led the first quarter return for the Nikkei 225 to 19.3 per cent.

However, in spite of the appetite for developed market equities, the emerging world delivered poor returns and edged into negative territory for the quarter.

The second quarter of 2013 started with mixed results, resulting in opportunities for managers to outperform.

Indications were that UK economic pressure had not yet abated.

In Europe, ‘not-so-bad’ economic data suggested that the eurozone might be close to exiting recession.

In the US, consumer spending rebounded in May, a sign that the biggest part of the American economy would underpin growth in the second quarter.

Looking ahead, the general consensus remains positive for equity markets in the longer term; this is reflected within the Arc’s Market Sentiment Survey.

The results for each of the four main asset classes, is shown in the chart opposite. A predominantly gold bar indicates that managers are generally negative, whereas blue indicates positive sentiment.

Data labels indicate the percentage of respondents, who were either negative or positive with neutral results excluded.

Some interim volatility is expected going forward, particularly with the QE tapering looming on the horizon.

Fixed income portfolios, and those with cautious mandates, may be under the spotlight in the latter half of 2013.

Dan Hurdley is director of research at Asset Risk Consultants.

PRIVATE CLIENT’S THEMES

Conversations that Asset Risk Consultants has had this year with private client discretionary managers have covered several themes:

- Managers are working very hard in the fixed income space to find value. Index-linked products generally worked against managers and conventional bonds remained out of favour in portfolios.

- Duration was shortened further with some managers holding significant cash allocations in cautious portfolios, resulting in a “barbell” with equities providing the returns and cash moderating the risk.